August 15, 2026
For many years, pensions have been one of the most tax‑efficient ways to build wealth and pass it to the next generation. Families were encouraged to spend cash first, use ISAs and investments where needed, and preserve the pension for as long as possible. This strategy worked because unused pension funds were generally outside the scope of Inheritance Tax (IHT). However, upcoming changes, particularly regarding IHT For Pensions in 2027, could significantly affect this approach.
That long‑standing advantage is now changing — significantly.
From 6 April 2027, most unused pension funds and pension death benefits will be brought into the value of a deceased person’s estate for Inheritance Tax purposes. This means many families who planned to leave pension wealth to children or grandchildren could now face a 40% IHT charge, and in some cases, additional income tax on top.
This update explains what is happening, why it matters, and what steps families should consider now.
The UK Government has confirmed that unused pension funds will be treated as part of a person’s estate for IHT from April 2027. The policy aims to remove distortions that allowed pensions to be used as a tax‑planning vehicle rather than purely for retirement income.
Historically, most UK pension schemes were discretionary. This meant pension providers could choose whether to pay benefits to beneficiaries, keeping the funds outside the estate for IHT. Families could accumulate large pension pots, use other assets to fund retirement, and pass the pension on tax‑free.
The Government now considers this inconsistent and economically distortive. As a result, the rules are being aligned so that unused pension funds are treated similarly to other assets.
1. Unused pension funds will be included in the estate for IHT
From 6 April 2027, most unused pension funds and pension death benefits will be counted when calculating the value of a deceased person’s estate.
2. The standard 40% inheritance tax rate will apply
Anything above the available nil‑rate band (£325,000) and residence nil‑rate band (up to £175,000 if applicable) may be taxed at 40%.
3. Income tax may also apply
If the pension holder dies after age 75, beneficiaries will pay income tax on withdrawals at their marginal rate — 20%, 40%, or 45%.
This creates a potential double tax scenario:
• 40% inheritance tax, plus
• up to 45% income tax on withdrawals.
4. Overseas pensions are included
Most non‑UK pensions will also fall under UK inheritance tax rules from April 2027 for long‑term UK residents.
5. Some pensions remain excluded
Death‑in‑service benefits and certain defined‑benefit dependant pensions are not affected.
The age at death remains a key factor:
• Death before 75
Beneficiaries can usually withdraw inherited pension funds without income tax.
However, from 2027, the pension may still be subject to inheritance tax.
• Death after 75
Beneficiaries pay income tax on withdrawals at their marginal rate.
Combined with the new IHT rules, this could create a substantial tax burden.
Given that the median age of death in England and Wales is 81.8 for men and 85.5 for women, many inherited pensions will fall into the post‑75 income‑tax category.
NFU Mutual calculated a scenario where a married couple with £2.7 million of total wealth, including a £700,000 pension, could see up to 91% of the pension lost to combined taxes.
This extreme example highlights the potential severity of the new rules — especially for families who have deliberately preserved pension wealth for inheritance.
1. Families with large pension pots
Those who have accumulated significant pension savings and planned to leave them untouched for beneficiaries.
2. Individuals with overseas pensions
Long‑term UK residents with foreign pension arrangements will see these included in their UK estate.
3. People relying on pensions as an inheritance strategy
The traditional “spend cash first, preserve the pension” approach may no longer be optimal.
4. Beneficiaries who are higher‑rate taxpayers
Children or grandchildren earning above £50,270 may face 40% income tax on inherited pension withdrawals.
For many families, pensions were the “safe” asset — protected from IHT and flexible for beneficiaries. The 2027 reforms change that landscape entirely.
Estate planning strategies that were tax‑efficient for decades may now expose families to substantial tax bills.
This means:
• Wills may need updating
• Trust planning may need revisiting
• Pension withdrawal strategies may need adjusting
• Lifetime gifting may become more attractive
• Blended use of ISAs, investments, and pensions may be more efficient
• Business owners may need to reconsider succession planning
1. Review your pension death‑benefit nominations
Ensure your nominations reflect your wishes and consider whether a trust arrangement may be appropriate.
2. Reassess your retirement‑income strategy
The old “preserve the pension” approach may now result in higher tax for your beneficiaries.
3. Consider lifetime withdrawals
Taking controlled withdrawals before age 75 may reduce the taxable value of your estate.
4. Explore trust planning
Certain trust structures may help manage how pension wealth is passed on.
5. Review your will and estate plan
Ensure your documents reflect the upcoming changes and your long‑term intentions.
6. Understand how your spouse is affected
Anything left to a spouse remains exempt from IHT — but what happens when the second spouse dies?
7. Consider the impact on your children
Higher‑rate taxpayers may face significant income tax on inherited pension withdrawals.
As an experienced estate planning practitioner specialising in wills, trusts, LPAs, and inheritance‑tax mitigation, I help families across the UK navigate complex changes like this.
With the 2027 pension reforms approaching, now is the ideal time to review your arrangements.
I can help you:
• Understand how the new rules affect your personal situation
• Review your pension nominations and death‑benefit structure
• Assess whether trust planning is appropriate
• Rebalance your estate to reduce future tax exposure
• Update your will and LPA
• Create a long‑term strategy that protects your family’s inheritance
My office in South Anston, Sheffield offers a calm, private, and fully accessible environment for confidential discussions.
It is also worth remembering that family circumstances evolve. Relationships change, financial needs shift, and beneficiaries’ tax positions may be very different in the future.
By keeping your estate plan flexible — and reviewing it regularly — you ensure your arrangements remain suitable, tax‑efficient, and aligned with your wishes.
If you have a pension, this change affects you.
If you intend to leave pension wealth to your family, this change affects them.
And if you want to protect your legacy, now is the time to act.
Matrix Estate Planning Ltd
4 Orchard Gardens
South Anston, Sheffield
S25 5FL
I offer clear, professional guidance tailored to your circumstances.
To arrange a review, simply contact me today.
